30 April '08: ABG Shipyard (ABGS.BO): Buy: Revising Price Target to Rs865 (C)
? New Rs865 target price; Reiterate Buy — We continue our coverage of ABG
with a revised target price of Rs865, offering attractive 41% upside. The sharp
stock correction (-38% YTD), primarily on concerns of a global slowdown,
presents an attractive buying opportunity as ABG is largely immune to such
concerns due to dominance in niche segments (OSVs, Handysize bulkers),
which remain buoyed by strong replacement demand.
? Further capacity expansions planned — In addition to the ongoing setting up of
a ship and rig building facility at Dahej, ABG now plans to expand its Surat yard
in two phases – augmenting the existing facility by Dec-08 (phase I) and
setting up of a greenfield yard by 2011 (phase II) for total capex of ~Rs12bn.
The expansions will enable ABG to build vessels of all types up to 350m in
length. We build in contribution from Surat phase I into our earnings estimates
and assume the expansions would be part-financed by equity (Rs3.2bn
preferential issue of warrants to promoters), the balance being debt-financed.
? Reducing earnings by 2-12% — We are reducing our FY09-10E EPS by 2-12%
driven by a combination of: 1) paring down of our margin assumptions due to
risk of higher raw material prices; 2) 8% dilution on account of the preferential
issue of warrants; and 3) earnings contribution from Surat I (FY09E onwards).
Order book of Rs83bn (8x FY08E sales) provides strong earnings visibility and
comfort to our estimates, completely covering revenues for the next 3 years.
? Valuing at 12x P/E — Our new TP is based on 12x Sep-09E P/E (15x Mar-09E
earlier) of core shipbuilding and includes Rs70 value accretion from WISL.
New target price of Rs865
? Our new target price of Rs865 provides 41% upside from current levels and
incorporates:
– Core value of shipbuilding business of Rs795/share, based on 12x Sep-
09E earnings
– Value accretion from Western India Shipyard (WISL) acquisition of
Rs70/share, based on 15x FY10E earnings attributable to ABG Shipyard
? We have reduced our target multiple for the core shipbuilding business –
which includes the Surat facility (existing + phase I; phase II not included)
and upcoming Dahej facility – to 12x Sep-09E earnings (from 15x Mar-09E
earlier), to factor in a reduction in global peers’ multiples.
? The target multiple of 12x Sep-09E earnings also compares favorably with
the imputed target P/E of Korean shipyards (average 16.4x CY09E, 12.0x
CY10E), which though much larger in scale, have similar earnings growth
over the next few years and are more exposed to global developments.
? We assume no contribution from WISL in FY09E (as the deal is likely to be
completed by end-CY08) and assign a higher multiple of 15x vs. 12x (for the
core shipbuilding business) due to the more steady, non-cyclical nature of
earnings stream from the ship and rig repair business and the shortage of
similar facilities in India.
Key catalysts
1. New orders – primarily for offshore support vessels, to be built at Surat
(given that Dahej is nearly completely tied up for the next few years).
2. Rig order – though delayed, a rig order would be significant given its size
(>US$160m). However, the yard would only be commissioned by end-08E
and hence the order may come through over the next few months.
3. 4Q results – while these would only be announced along with full year
audited results in May/June, strong results driven by sustained robustness
in margins and seasonal strength could be a positive surprise.
4. Extension of the subsidy scheme – this has been delayed for quite some
time now, and though there is still no clarity on either extension or
termination of the scheme, industry participants expect the scheme to be
extended by another five years, though the quantum of subsidy may be
brought down to 20% from 30% earlier. We note that all of ABG’s export
orders are eligible for subsidy, as all contracts were signed before expiry of
the scheme in Aug-07. If the scheme is extended, the reduced uncertainty
may also result in a flurry of new order announcements from companies.
5. Approval of SEZ status for the Dahej facility – this would provide tax
incentives that would neutralize the impact of subsidy on revenues from
the Dahej yard. |
